Sizing up China’s Anti-Foreign Sanctions Law and Other Countermeasures

China’s top legislator announced in March 2021 that it would work on laws against external sanctions, interference and long-arm jurisdiction, indicating that the country is aiming to take an increasingly active stance and more vigorous measures against the application of foreign laws and measures against China. From the Unreliable Entity List (UEL) stipulated by the Provisions on the Unreliable Entity List (the Provisions) by China’s Ministry of Commerce (MOFCOM) in 2020, to the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the Blocking Rules) issued by MOFCOM in 2021, to the Anti-Foreign Sanctions Law of the People’s Republic of China, passed by the Standing Committee of the National People’s Congress in June 2021, China has gradually formed its own body of knowledge in dealing with foreign sanctions that are perceived to be unjustified for a variety of reasons. These anti-sanctions measures expose multinational companies doing business in China to a more complex regulatory environment to which they should pay due attention. This chapter details the three aforementioned regulations and their impact on multinational companies.

Anti-Foreign Sanctions Law

On 10 June 2021, the Anti-Foreign Sanctions Law was passed by the Standing Committee of the National People’s Congress and officially promulgated for implementation. Unlike the Provisions and the Blocking Rules, which were passed by MOFCOM, the Anti-Foreign Sanctions Law was passed by the National People’s Congress (i.e., at a higher level). This provides a higher and clearer legal authorisation and basis for China to impose sanctions, while also providing a means for Chinese enterprises to deal with foreign sanctions and ‘improper’ extraterritorial application of foreign laws. The Law is, therefore, of importance both for multinationals and for Chinese companies that may be affected.

Set out below is the main mechanism established by the Anti-Foreign Sanctions Law, its possible impact on Chinese and foreign companies and the problems it may raise for companies.

Situations targeted by the anti-sanction measures

Article 3.2 of the Anti-Foreign Sanctions Law provides that China’s anti-sanction measures are aimed at any act by which ‘a foreign country violates international law and basic norms of international relations, contains or suppresses China on various pretexts or, in accordance with its own laws, adopts discriminatory restrictive measures against any Chinese citizen or organisation, and interferes in China’s internal affairs’. It is not sufficient for only one of the elements described above to be present; for the Law to apply, all of the elements must be evaluated in a comprehensive manner. In other words, the Anti-Foreign Sanctions Law does not necessarily apply to all foreign sanctions. Instead, when interpreted together with the wording of Article 3.1, we believe that the Law essentially focuses on actions ‘interfering in China’s internal affairs’, and the discriminatory restrictive measures that fall within this definition are, therefore, the most likely target of the Law (i.e., sanctions imposed by some countries on China’s state organs, state staff and Chinese enterprises on the grounds of issues relating to Xinjiang and Hong Kong are the most typical cases of ‘interfering in China’s internal affairs’, and would, we believe, be the key target of the Law).

However, the Anti-Foreign Sanctions Law may have a wider application. Article 15 provides that ‘where foreign countries, organisations or individuals conduct, assist in or support acts that endanger China’s sovereignty, security or development interests, and necessary anti-sanction measures need to be taken, the relevant provisions of this Law shall apply mutatis mutandis’. This provision does not specifically mention the element of ‘interfering in China’s internal affairs’, so allows for wider interpretation, possibly to include situations where countries impose restrictions on the development of China’s high-tech industry through sanctions and export controls.

Understanding the ‘anti-sanction list’

Under Article 4 of the Anti-Foreign Sanctions Law, the relevant departments under the State Council may decide to include individuals and organisations directly or indirectly involved in the development, decision-making and implementation of the discriminatory restrictive measures[2] on the anti-sanction list. Article 9 provides that the determination, suspension, modification or cancellation of the anti-sanction list shall be announced in the form of an order by the Ministry of Foreign Affairs (MFA) or other relevant departments under the State Council.

Since July 2020, the MFA has announced a series of anti-sanction measures to impose sanctions on foreign entities and individuals who are viewed as having behaved in ways that are deemed to be unacceptable on issues involving Hong Kong, Taiwan and Xinjiang. The Anti-Foreign Sanctions Law formally establishes the anti-sanction list, indicating that China’s anti-sanction measures will, in future, be standardised and applied more systematically.

In addition, under Article 5 of the Anti-Foreign Sanctions Law, the relevant departments may decide to implement anti-sanction measures on individuals who or organisations that are specifically related to subjects on the anti-sanction list, including:

  • spouses and immediate family members of individuals on the list;
  • senior officers or actual controllers of organisations on the list;
  • organisations in which individuals on the list are senior officers; and
  • organisations that are actually controlled by or established and operated with the participation of individuals and organisations on the list.

The above-mentioned individuals or organisations are not automatically subject to sanctions; whether or not to impose anti-sanction measures on them would need to be formally decided and announced by the relevant departments under the State Council. This is different from the 50 Percent Rule applicable to specially designated nationals (SDNs) under the laws of the United States (i.e., the property and interests in property of entities directly or indirectly owned 50 per cent or more in the aggregate by one or more blocked persons are considered blocked).

Anti-sanction measures

Article 6 of the Anti-Foreign Sanctions Law lists three types of anti-sanction measures:

  • no visa, no entry, cancellation of visa or expulsion (mainly implemented by the MFA or the Ministry of Public Security (Exit-Entry Administration));
  • seizure, attachment and freezing of movable property, real estate and other types of property in China; and
  • forbidding or restricting organisations or individuals in China from conducting transactions and otherwise engaging in any cooperation with listed organisations or individuals.

In addition, the Anti-Foreign Sanctions Law also stipulates the ‘miscellaneous provisions’ (i.e., ‘other necessary measures’), to grant the administrative organs the necessary discretion to carry out their responsibilities under the Law.

By way of further explanation, ‘seizure, attachment and freezing’ are ‘administrative coercive measures’, and, according to the relevant provisions of the Administrative Coercion Law, the administrative organ shall deliver a written decision on seizure or attachment or a notice of freezing to the relevant persons when implementing these administrative coercive measures. What remains to be further clarified in practice is whether the domestic subject is obliged to proactively implement the seizure, attachment and freezing or whether they should only do this after receiving a notice from the relevant departments.

Once the state implements measures ‘forbidding or restricting organisations or individuals in China from conducting relevant transactions and . . . cooperation with listed organisations or individuals’, domestic subjects are required to immediately stop all such commercial or non-commercial transactions and cooperation.

Practical difficulties for companies in identifying anti-sanction measure objects

In addition to the subjects on the anti-sanction list, the relevant departments under the State Council may impose sanctions on individuals or organisations related to them. The Anti-Foreign Sanctions Law goes further than the sanctions measures announced by the MFA in 2021 by refining the scope of both ‘related individuals or organisations’ , which makes it easier for domestic subjects to comply.

While the scope of the Anti-Foreign Sanctions Law makes things clearer, it also poses practical difficulties for companies – especially multinational companies – whose operations may be impacted by the Law. For companies in their normal business dealings, it may be difficult to exhaustively identify whether their customers, distributors, suppliers or intermediaries are related to the subjects on the anti-sanction list, even where they have conducted necessary due diligence on these entities.

Even financial institutions, which have higher due diligence obligations than other businesses in terms of knowing their clients under the current anti-money laundering due diligence framework, may not be able to easily identify individuals and organisations related to subjects on the anti-sanction list. For example, the current anti-money laundering laws and regulations provide that financial institutions must identify the parents, spouses, children and other close relatives of ‘important foreign political persons and senior officers of international organisations’ when carrying out due diligence, but are not required to identify the spouses and immediate family members of other individuals. Therefore, if the client of a financial institution is not an important foreign political person, the financial institution would not be required to know the client’s spouse and immediate family members, and would not, therefore, be able to confirm whether the client is also subject to the restrictions under the anti-sanction list.

Given these limitations, our view is that companies should fulfil their obligations to identify individuals, as described above, in a prudent and reasonable manner; for example, for any subject on the anti-sanction list, the enterprise has the obligation to stop trading or communicating with it; for the related parties of the subject on the anti-sanction list, it depends on whether the enterprise knows or should reasonably have known that there is an association. If the enterprise fails to find any association after following reasonable due diligence procedures, while being subject to authorities’ confirmation our view is that they may not be held to account for failing in their obligations under the Anti-Foreign Sanctions Law.

Subject of obligation of the Anti-Foreign Sanctions Law

Under Article 11, organisations (including foreign-invested enterprises) and individuals (including foreigners in China) in China are required to implement the anti-sanction measures announced by the various departments under the State Council. Organisations and individuals that are held to violate the provisions discussed above shall be restricted or prohibited from engaging in these activities.

Article 12 provides that no organisation or individual may implement or assist in the implementation of discriminatory restrictive measures taken by foreign countries against Chinese citizens and organisations, and, furthermore, grants Chinese subjects who may be affected to their detriment, the right to judicial remedy. Article 12 is extensive and needs to be fully considered by both Chinese and foreign enterprises.

  • Comparing the language in Articles 11 and 12, we understand that ‘any organisation and individual’ in Article 12 includes Chinese subjects and foreign subjects.
  • There are differences between the ‘right to judicial remedy’ provided for in Article 12 and that outlined in the Blocking Rules. Under the Blocking Rules, it is a precondition that MOFCOM’s injunction must have been granted before the Chinese subject can apply for judicial remedy, while in the case of the Anti-Foreign Sanctions Law, there is no requirement for this precondition. In other words, there is a lower threshold for the Chinese subject to start the process of judicial remedy under the Anti-Foreign Sanctions Law.
  • The Anti-Foreign Sanctions Law does not clearly define the scope of ‘discriminatory restrictive measures’. From a broad perspective, it seems that the term can include all sanctions and export control measures against China. However, we believe that the ‘discriminatory restrictive measures’ referred to in Article 12 should meet the conditions of ‘interfering in China’s internal affairs’ (as set out in Article 3) or ‘endangering China’s sovereignty, security and development interests’ (as set out in Article 15).
  • In reality, it is clear that some domestic and foreign subjects have responded without justification against Chinese subjects that have been sanctioned on the US SDN List or listed for export controls on the US Entity List. This discriminatory behaviour has been seen in relation to sanctions, where all transactions with Chinese subjects on the SDN List have been stopped, even where there is no US connection; and, in the case of export controls, all cooperation with Chinese organisations on the Entity List has stopped without further analysis of whether the items concerned are subject to US export controls. This behaviour is likely to be found to be discriminatory, and it appears that it is this behaviour that is the principal target of Article 12.

The Anti-Foreign Sanctions Law is bound to have a profound impact on the corporate compliance governance of multinational companies. While there are issues subject to further clarification by subsequent legislation and law enforcement, the law demonstrates China’s determination to fight against foreign interference in its internal affairs through the means of sanctions and other discriminatory restrictive measures, to which Chinese and foreign enterprises should pay full attention.

Unreliable Entity List

On 19 September 2020, MOFCOM announced the official release and implementation of the Provisions. Each key article of the Provisions is set out and interpreted below.

Article 2 The State shall establish the Unreliable Entity List System, and adopt measures in response to the following actions taken by a foreign entity in international economic, trade and other relevant activities:
  1. endangering national sovereignty, security or development interests of China;
  2. suspending normal transactions with an enterprise, other organisation, or individual of China or applying discriminatory measures against an enterprise, other organisation, or individual of China, which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of the enterprise, other organisation, or individual of China.
As used in these Provisions, the term ‘foreign entity’ refers to an enterprise, other organisation, or individual of a foreign country.

The Provisions define a clear scope of application of the UEL, but also leave room for interpretation by government in the implementation.

First, safeguarding ‘national sovereignty, security or development interests’ is the most important starting point for establishing the UEL system. Second, the situation described in item (2) of this Article is most typically reflected in situations in which some Chinese enterprises find themselves: where, by being included on the Entity List, they are restricted from purchasing commodities and software from the United States as well as products arising from US software and technology. It seems more than likely, therefore, that anyone that puts Chinese enterprises in an unfavourable situation will be likely targets of the UEL.

Article 4 The State shall establish a working mechanism composed of relevant central departments (hereinafter referred to as ‘the working mechanism’) to take charge of organisation and implementation of the Unreliable Entity List System. The Office of the working mechanism is located at the competent department of commerce of the State Council.

The UEL system will be the responsibility of a multi-departmental and collaborative ‘working mechanism’, not just a matter for MOFCOM. This is a sensible arrangement as the effective management, implementation and enforcement of the UEL is likely only to be achieved with the involvement of many departments.

Article 5 The working mechanism shall, in accordance with its duties and functions or upon suggestions and reports from the relevant parties, decide whether to investigate the actions taken by the relevant foreign entity; if it decides to investigate, an announcement shall be made.
Article 6 When investigating the actions of a foreign entity, the working mechanism may inquire [of] the relevant parties, consult or copy the relevant documents and materials, and take other necessary means. The foreign entity may state or defend its case during the investigation.
The working mechanism may, based on actual circumstances, decide to suspend or terminate the investigation. If the facts on which the decision to suspend the investigation is based have substantially changed, the investigation may be resumed.

Before an entity is included in the UEL, as a general rule, it will be investigated and the investigation must be made public. During the investigation, the entity has the right to state, defend and produce evidence. In this way, the legitimate rights and interests of the entities subject to investigation are protected, which is a key principle underlying the operation of the UEL system. An investigation can be carried out either in accordance with the duties and functions set out in the working mechanism or following an approach from the ‘relevant parties’, indicating that a Chinese entity that may have been affected by a foreign entity’s actions, such as cutting-off supplies, ceasing cooperation or engaging in other discriminatory measures, may report the foreign entity to the working mechanism.

Article 7 The working mechanism shall, according to the results of the investigation and by taking into overall consideration the following factors, make a decision on whether to include the relevant foreign entity in the Unreliable Entity List, and make an announcement of the decision:
  1. the degree of danger to national sovereignty, security or development interests of China;
  2. the degree of damage to the legitimate rights and interests of enterprises, other organisations, or individuals of China;
  3. whether being in compliance with internationally accepted economic and trade rules;
  4. other factors that shall be considered.

This clause reflects the fact that, in implementing the UEL system, China is attaching greater importance to the protection of its national sovereignty, national security and development interests. At the same time, it is also apparent that China is keen to implement the UEL system within the framework of international economic and trade rules.

Article 8 Where the facts about the actions taken by the relevant foreign entity are clear, the working mechanism may, by taking into overall consideration the factors specified in Article 7 of these Provisions, directly make a decision on whether to include the relevant foreign entity in the Unreliable Entity List; if a decision is made to include in the Unreliable Entity List, an announcement shall be made.

This Article provides for a fast-track procedure for the working mechanism. According to the ordinary meaning of this Article, where the facts about the actions taken by the identified foreign entity are clear, the working mechanism is not obliged to carry out an investigation and announcement and may make an instant decision based on the factors stipulated in Article 7.

Article 9 In the announcement in which the relevant foreign entity is included in the Unreliable Entity List, an alert about the risks of conducting transactions with the said foreign entity may be made. In addition, the time limit for the foreign entity to rectify its actions may also be specified based on actual circumstances.

Article 9 states that any announcement (of a foreign entity being included in the UEL) will include an ‘alert about the risks of conducting transactions with the said foreign entity’. According to the specific measures listed in Article 10, entities included in the UEL are subject to a series of restrictions, such as restrictions on trade, restrictions on investment and restrictions on entry and exit, as mentioned above. However, the Provisions do not specify the risks and responsibilities faced by Chinese entities that engage in trade and investment activities with entities listed in the UEL.

Article 10 The working mechanism may, based on actual circumstances, decide to take one or several of the following measures ( ‘the measures’) with respect to the foreign entity which is included in the Unreliable Entity List, and make an announcement of the decision:
  1. restricting or prohibiting the foreign entity from engaging in China-related import or export activities;
  2. restricting or prohibiting the foreign entity from investing in China;
  3. restricting or prohibiting the foreign entity’s relevant personnel or means of transportation from entering into China;
  4. restricting or revoking the relevant personnel’s work permit, status of stay or residence in China;
  5. imposing a fine of the corresponding amount according to the severity of the circumstances;
  6. other necessary measures.
The measures provided for in the preceding paragraph shall be implemented according to law by the relevant departments in light of their respective duties and functions, and other units and individuals shall cooperate in the implementation.

This is a very important Article. It stipulates the specific restrictions and penalties that may be imposed on the entities included in the UEL, including restrictions on trade, investment, entry and exit, the right to work and reside in China, and imposition of fines. The inclusion of a clause covering ‘other necessary measures’ leaves room for other actions to be taken in future.

Although widely drafted, there are a number of aspects of this Article that require further clarification. For instance, would ‘restricting or prohibiting . . . invest[ment] in China’ have an impact on the investment activities already carried out by the foreign enterprise in China? If a foreign enterprise has established and operated a foreign-invested enterprise in China for many years, would the foreign-invested enterprise be affected because its parent company is included in the UEL?

Article 11 Where the time limit for the relevant foreign entity to make rectifications is specified in the announcement of the inclusion of the said foreign entity in the Unreliable Entity List, the measures provided for in Article 10 of these Provisions shall not be implemented within the time limit. Where the relevant foreign entity fails to make rectifications within the time limit, the measures shall be implemented according to Article 10 of these Provisions.

This Article is a highlight of the Provisions and reflects the main purpose of China’s UEL system. It is not China’s intention to impose upon the normal trade and investment rights of foreign enterprises, or to undermine the normal rules of international trade and economic cooperation. Rather, China hopes to use this system to protect its national sovereignty and security, as well as to protect the legitimate rights and interests of Chinese enterprises.

Thus, even if a foreign enterprise is included in the UEL, it may not be immediately subject to the restrictions described in Article 10, but might be given a reasonable ‘rectification period’. During this period, the restrictions on the enterprise do not take effect. Only if the enterprise fails to make rectifications it has been instructed to make within the rectification period would it be formally subjected to the restrictions and penalties.

Article 13 The working mechanism may, based on actual circumstances, decide to remove the foreign entity from the Unreliable Entity List. Where the relevant foreign entity rectifies its actions within the time limit specified in the announcement and takes measures to eliminate the consequences of its actions, the working mechanism shall make a decision to remove it from the Unreliable Entity List.
A foreign entity may apply for its removal from the Unreliable Entity List, [and] the working mechanism shall decide whether to remove it based on actual circumstances.
The decision to remove the foreign entity from the Unreliable Entity List shall be announced. Implementation of the measures taken according to Article 10 of these Provisions shall be ceased as of the date of the promulgation of the announcement.

This Article conveys a noteworthy point: the working mechanism ‘shall’ remove a listed entity from the UEL if it is considered to have rectified its actions and eliminated the consequences of its actions within the rectification period. For enterprises on whom a rectification period is not imposed, the working mechanism ‘may’ decide to remove them from the UEL on a case-by-case basis. In the latter situation, the criteria to be applied to remove an entity from the UEL are not clear, indicating that the working mechanism has great discretion. Therefore, the important point to note for foreign entities that may be included on the UEL is whether or not they are given a rectification period, which will have a direct impact on their rights and interests.

Blocking Rules

On 9 January 2021, MOFCOM issued Order No. 1 of 2021 to promulgate the Blocking Rules, which reflect the efforts of China to establish blocking mechanisms against the improper application of the ‘long-arm jurisdiction’ of foreign laws on Chinese enterprises and also offer scope for compensation for Chinese enterprises adversely affected by foreign laws and sanctions.

The key points of the Blocking Rules and their impact on Chinese and non-Chinese enterprises are set out below.

Framework of the Blocking Rules

Applicability

Article 2 of the Blocking Rules provides that the Rules apply to situations in which foreign laws and other measures unjustifiably prohibit or restrict the citizens, legal persons or other organisations of China (subjects of China) from engaging in normal economic, trade and related activities with a third country (or region) or its citizens, legal persons or other organisations (subjects of a third country).

Working Mechanism

The Blocking Rules provide that an inter-departmental body (the Working Mechanism), led by MOFCOM and joined by the National Development and Reform Commission and other departments, is responsible for considering whether there has been unjustified extraterritorial application of foreign laws and other measures.

Blocking Mechanism

The Blocking Rules establish the basic process to counteract unjustified extraterritorial application of foreign laws and measures through several steps.

  • Reporting obligations: when a subject of China is prohibited or restricted by foreign legislation or other measures from engaging in normal economic, trade and related activities with a third country or subjects of a third country, this matter should be reported to MOFCOM within 30 days.
  • Injunctions: if the Working Mechanism determines that the extraterritorial application of applicable foreign laws or measures is unjustified, it may decide that MOFCOM shall issue an injunction to the effect that the applicable foreign legislation and other measures shall not be recognised, implemented or complied with.
  • Application for exemption: subjects of China can apply to MOFCOM for exemption from compliance with an injunction.
  • Judicial remedy: where a person complies with the foreign laws and other measures within the scope of an injunction, and thus infringes the legitimate rights and interests of a subject of China, the subject of China can file a lawsuit in a Chinese court against the person and make a claim for compensation. If a judgment or ruling made under a foreign law within the scope of the injunction causes a subject of China to suffer damages, the subject of China may also file a lawsuit in a Chinese court to claim for compensation from the person who benefits from the aforementioned judgment or ruling. This article is undoubtedly the most eye-catching of the Blocking Rules. Note that the ‘person’ here does not explicitly exclude foreign subjects. This may exert pressure on foreign subjects considering abiding by these foreign laws and measures, and increase the possibility of excluding the application of the foreign laws and measures.
  • Supporting measures: if a subject of China suffers significant losses resulting from non-compliance with the applicable foreign legislation and other measures to abide by the injunction, government departments may provide support (i.e., financial compensation) based on the particular circumstances.

Legal liability

The Blocking Rules provide that any person who violates the obligation of truthful reporting or fails to comply with the injunction shall be given a warning, ordered to adhere to the injunction within a specified period, and may be punished with a fine, among other measures, depending on the circumstances.

Impact of the Blocking Rules

There are very urgent practical considerations that have led to the introduction of the Blocking Rules. During the ongoing US–China trade war, the United States has used economic sanctions and export control measures increasingly frequently, which have a very clear extraterritorial effect. It is, of course, not just Chinese enterprises that are affected, the impact is felt by companies of all countries that have dealings with the United States.

Consider this example: a Chinese company (Company A) had normal trade transactions with a Venezuelan state-owned enterprise (Company B), and then the United States placed Company A on the SDN List on the grounds that it violated US sanctions against Venezuela by transacting with Company B. Thereafter, shipping, freight forwarding, insurance, banking and other institutions with which Company A had normal business dealings (all non-US foreign companies, collectively referred to as Company C) terminated their cooperation with Company A for fear of being sanctioned by the United States, causing great losses to Company A. This scenario has been very common in the past few years, and more companies, in turn, have had to suspend or abandon their original trade or investment plans because of their concerns about sanctions imposed by the US government.

The Blocking Rules provide a channel of relief in the above situation. After the Blocking Rules take effect, Company A is obliged to report the situation to MOFCOM, and the Working Mechanism will conduct a comprehensive assessment of the situation. If the assessment concludes that there is an unjustified extraterritorial application of US laws, MOFCOM may issue an injunction against the designation of Company A on the SDN List or other laws and regulations, which can be viewed as an announcement by China that the designation of Company A or the legal basis of the designation, depending on the target of injunction, is invalid.

According to the Blocking Rules, any party that disregards the injunction and chooses to comply with the US sanction measures against Company A may be sued by Company A if Company A suffers losses. The injunction will put greater pressure on companies that refuse to deal with companies in the position of Company A as a result of its inclusion on the SDN List to consider their response more carefully.

Issues to be clarified

The Blocking Rules draw on internationally accepted practices and, additionally, offer some extra provisions to deal with the unjustified extraterritorial application of foreign laws and measures. At the same time, they provide a range of remedies to protect the legitimate rights and interests of Chinese enterprises. However, there are still many issues that need to be further clarified in practice.

What events trigger reporting obligations?

According to Article 5 of the Blocking Rules, what needs to be reported is the situation where a subject of China is prohibited or restricted by foreign laws and other measures from engaging in normal economic, trade and related activities with a subject of a third country. In the above-mentioned case, this could be interpreted to mean that Company A would be required to report to MOFCOM within 30 days of being included on the SDN List and also to report to MOFCOM a second time when Company C stops cooperating with Company A.

The Blocking Rules do not explicitly list the foreign laws and measures to be blocked. US secondary sanctions have long been criticised for their unreasonable long-arm jurisdiction as their application does not require a US nexus. If a company is prohibited from transacting with the subject of a third country due to US secondary sanctions, this situation would clearly trigger the reporting obligation under the Blocking Rules.

In addition, US primary sanctions and export control measures also have extraterritorial application (e.g., on the engagement of US personnel, the use of US dollars in transactions involving the US financial system and the inclusion of controlled US-origin content or technologies in products), and if an enterprise is subject to the corresponding restrictions, it may also be obliged to report under the Blocking Rules. However, it remains to be seen whether US primary sanctions and export control measures may also be considered to be ‘unjustified application’ by the Working Mechanism, given the existence of a US nexus.

In addition, would the Blocking Rules apply in the situation where an enterprise voluntarily abandons or ceases affected activities purely due to the fear of extraterritorial application of foreign laws? For past investments and trade activities that have been abandoned or stopped due to secondary sanctions, will the reporting obligation still be triggered? These are all issues that will require more specific guidance from the Chinese authorities.

Applicable situations and targets of injunctions

The injunction is the core mechanism that has been established by the Blocking Rules. Once an injunction is issued, it is binding on all individuals or entities in China. However, there are still some questions that remain to be clarified in practice.

First, would any injunction apply to foreign subjects? While an injunction as an administrative order issued by the Chinese government primarily regulates Chinese entities and activities in China, the impact of the Blocking Rules will be greatly reduced if the injunction does not apply to foreign entities. For example, in the above-mentioned case, if the injunction cannot be applied to Company C, the situation of Company A could not be fundamentally improved.

Second, although the injunction applies to Chinese subjects, if the economic and trade relationship itself does not involve the relationship between subjects of China and subjects of a third country, can the injunction still apply?

In recent years, many Chinese companies have been placed on the US export control Entity List, and the following scenario often arises in practice: US Manufacturer D sells US-origin equipment to Chinese Company A through its Subsidiary E in China. If Company A is included on the Entity list, Company D and its Subsidiary E in China will stop selling equipment or providing follow-up technical support to Company A on the grounds that it has to comply with the US Export Administration Regulations (EAR).

Under these circumstances, can Company A report to MOFCOM and then apply for an injunction? If an injunction is issued to invalidate the restrictions on Company A, should Company E comply with the injunction and continue to sell to Company A? If Company E chooses to disregard the injunction and continues to comply with export restrictions under the EAR against Company A, can Company A file a lawsuit against Company E on the grounds of the Blocking Rules?

Article 2 of the Blocking Rules provides that the rules only apply to situations where foreign laws and other measures unjustifiably prohibit or restrict the subjects of China from engaging in normal economic, trade and related activities with subjects of a third country. In the above situation, Company A’s transactions with Company D or Company E do not seem to meet the above criteria, and therefore theoretically it would be difficult to apply for an injunction against the sanctions measures or to file a lawsuit against Company D or Company E. However, if Company D or Company E’s cut-off behaviour causes Company A to have difficulty in carrying out economic and trade activities with subjects of third countries, the possibility of applying the injunction cannot be completely excluded. How this situation may be regulated in practice by the Blocking Rules remains to be clarified.

Judicial remedies

As mentioned above, because the Blocking Rules have ‘protecting the legitimate rights and interests of subjects of China’ as their principal purpose, the ‘persons’ that can be sued for disregarding injunctions and causing damage to subjects of China should, in theory, be limited to Chinese individuals or entities.

One key question to be clarified is the relationship between the judicial remedy through the Blocking Rules and the existing dispute resolution mechanism in the affected transactions. When participants in international economic, trade and related activities have agreed on the applicable law of the transaction and the dispute resolution mechanism in the event of a dispute, should the Chinese parties seek remedies in accordance with agreed dispute resolution clauses or choose to file a lawsuit in a Chinese court under the Blocking Rules, when the application of the Blocking Rules is triggered?

These are questions that touch on fundamental issues of how a country’s judiciary intervenes in international trade and economic affairs and the interconnection between the courts and arbitration as methods of resolving disputes. These questions will doubtless be given full attention in subsequent implementation of the Blocking Rules and coordinated in individual cases.


Footnotes

[1] Kate Yin and Derrick Zhao are partners at Fangda Partners.

[2] As set out in Article 3 of the Anti-Foreign Sanctions Law.

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